Long-term sustainable funds domiciled in Europe recorded net inflows in the first four months of 2024, after struggling in 2023.
As in the broader market, sustainable funds benefited from investors’ appetite for bond strategies, while equity and mixed funds failed.
However, only funds falling under Article 8 of the Sustainable Finance Disclosure Regulation (SFDR) have raised new money. Article 8 covers “light green” funds which focus on environment, social and governance. These funds have recorded net inflows of 16.85 billion euros since the start of the year, although April went into the red after three positive months. Preliminary data indicates that May was also a positive month for Section 8 funds – final data for May will be released later this week.
Article 9 funds, also known as “dark green” funds, have a sustainable investment objective. They have recorded four consecutive months of outflows, bringing net redemptions to 7.13 billion euros since the start of the year, according to data published in Morningstar Direct.
The universe of Article 8 and Article 9 funds includes open-end funds and exchange-traded funds. Money market funds, funds of funds and feeder funds are excluded. Funds that do not have ESG characteristics are classified as Section 6 (“not stated” in Morningstar Direct).
The generally positive climate in the field of sustainable investment is also reflected in all European funds. All told, European-domiciled funds collected €67.1 billion in the first four months of the year, with each month showing positive net inflows.
Bond funds record inflows
Article 8 bond funds collected €60.42 billion between January and April, while Article 9 bond funds collected €4.22 billion. These figures should be compared with the 9 billion euros in net collection of Article 6 funds.
“The larger flows into Section 8 bond funds relative to Section 6 bond funds perhaps reflect investors’ expectation that the prolonged interest rate environment favors investment grade bonds , which are generally included in ESG-oriented portfolios”, explains Hortense Bioy, Global Head Sustainability Research at Morningstar.
In January, financial markets had factored in the fact that the European Central Bank would lower its key rates five times in 2024, with the first cut expected in the spring. Now, after the rate cut earlier this month, one or two more cuts are expected this year. The ECB also raised its inflation forecasts, which dashed hopes of a relaxation of monetary policy.
As for Article 9 funds, bond inflows – €4.22 billion in total – were dampened by significant redemptions in other asset classes, including the record amount of over of 10 billion euros for equity funds.
Article 8 equity funds in withdrawal
“Light green” equity funds also continued to face outflows and recorded net outflows of €19.52 billion in the first four months of the year. This category has seen monthly net withdrawals since April 2023. So far in the year, European large caps have been the category that has suffered the most outflows in absolute terms. In contrast, net flows to Article 6 equity funds amounted to €41.77 billion.
This divergence did not surprise careful observers: “It can be assumed that some investors have taken a more cautious approach to ESG investments over the past year, after the underperformance of ESG and ESG strategies in 2022′ “partly due to their typical underweighting in traditional energy companies and overweighting in technology and other growth sectors,” Morningstar’s Bioy wrote in January 2024 in the report “SFDR Article 8 and Article 9 Funds: Q4 in background”.
Many sustainable funds take a cautious approach to investing in fossil fuels, and in addition, Russia’s invasion of Ukraine has driven up prices of defense companies. This is reflected in the indices that reflect these markets: The Morningstar Europe Sustainability Index lost 16.79% in 2022, while the losses of the Morningstar Europe GR Index were limited to 11.11% (in euros).
If we consider the recent evolution of these two Morningstar indices, the situation is different in terms of performance for 2024: the Morningstar Europe Sustainability index has increased by 10.87% (in euros) since the start of the year , while the broader market lags slightly at +10.58% (data as of June 12).
Bioy also highlighted that additional factors such as greenwashing and the ever-changing regulatory environment are weighing on investor demand for ESG funds. The wave of reclassification of funds to Article 8 of 9 under the SFDR at the end of 2022 and other issues related to the implementation of the regulation have caused confusion among investors and other market participants, he said. -she declared.
ETFs are gaining market share
As with the broader market, passive strategies continue to gain market share in the SFDR landscape. Passive strategies have raised €13.14 billion since the start of the year, with the total assets of passive funds falling under Articles 8 and 9 standing at €683 billion at the end of April.
The much larger active SFDR universe (its assets amounted to €4,761 billion as of April 30, 2024) also saw positive net inflows into Article 8 funds (€1.7 billion). euros since the start of the year). In contrast, actively managed Article 9 funds suffered losses of €7.78 billion between January and April.
From an organic growth perspective, Article 8 funds posted a negative organic growth rate of 0.08% over the last 12 months at the end of April. In contrast, Article 9 funds recorded a negative organic growth rate of 0.88%. In contrast, funds that are not classified as Article 8 or Article 9 according to the SFDR have shown positive average organic growth rates.
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